UPDATE 1-Bank of England turns up the heat on accounting firms

(Adds more detail, industry reaction)

By Huw Jones

LONDON, Feb 27 (Reuters) - The Bank of England would havethe power to fine or ban accounting firms from working infinancial services under proposals setting out how the UKcentral bank's regulation arm will monitor the accountingindustry.

The proposals from the Prudential Regulation Authority(PRA), which supervises Britain's banks, were published onFriday and show how the watchdog plans to oversee theaccountants and actuaries hired by banks and use new powers tosanction them.

The accuracy of external audits has come under scrutiny byregulators and governments after banks had to be rescued bytaxpayers in the 2007-09 financial crisis just months afteraccounting firms gave them a clean bill of health.

The plans echo measures being taken inside banks to makeindividuals more directly accountable for their actions, makingit easier to punish rule breaches.

Britain's big banks, such as HSBC, Barclays, Lloyds and RBS, all use one of the"Big Four" accounting firms, PwC, Deloitte,EY and KPMG.

"Although engagement between external auditors and the PRAhas improved in recent years, the PRA's monitoring of thequality of auditor-supervisor dialogue has shown that there ismore that can be done," the PRA said in a statement.

The watchdog is proposing that accountants for the biggestUK headquartered deposit-taking banks provide written reports tothe supervisor annually on financial reporting and theaccompanying audit.

"These written reports will enable the PRA to gain a betterunderstanding of the risks in banks' financial reporting andhelp supervisors to focus on the key areas of risk," the PRAsaid.

The aim is to spot problems early before they get out ofhand and so action can be taken in a timely way. The newrequirement will be introduced in full in relation to auditsending on or after Nov. 1, 2016.

"Where auditors and actuaries fail to provide us with theinformation that we need to supervise firms effectively, we nowhave disciplinary powers which allow us to take action torectify this," PRA Chief Executive and Bank of England DeputyGovernor Andrew Bailey said.

Iain Coke, head of financial services at the ICAEWaccounting industry body, said a written report would inpractice mean auditors doing extra homework at times to providegood answers to questions from supervisors.

"This is about making sure auditors are more relevant, andthat is absolutely integral to rebuilding trust in banking,"Coke said.

(Editing by David Clarke and Jane Merriman)